Sometimes subscribers write in with questions that prompt article ideas. Sometimes I scan the CBOE's "Ask the Institute" to see what kind of questions are being asked, under the premise that our subscribers might have some of the same questions.

A recent question concerned a bull call debit spread the questioner had purchased. The June 22 column discussed the trader's puzzlement when the underlying stock went up, but the value of the bullish spread did not increase appreciably.

Such a spread is initiated by buying a call and then selling a further out of the money call. Because the bought call is closer to the money, it's going to be more expensive and so there's a debit to enter the spread. In most cases, unless there's a usually avoidable stock assignment, that debit is the total risk of the trade. (If the underlying stock pays dividends, be sure you know when ex-dividend day is and talk to your broker about assignment risks as ex-dividend day approaches.) If the stock ends up below the strike price of the long call, both calls are worthless and the cost of the spread will be the amount of the loss unless the spread was previously closed.

Visuals are sometimes helpful, so let's look at a theoretical profit/loss graph at expiration. This theoretical position consists of a 10-contract AA NOV bull call debit spread established at the close on October 2, 2009 by buying a NOV 13 call and selling a NOV 15 call. I input my brokerage's commissions for such a trade and used the mid-price calculations that I've got as a preset on OptionsOracle. Due to the use of mid-prices in these calculations, the actual debit for a real trade rather than a theoretical one might have been slightly higher than the calculated one. The calculations returned a total investment of \$600.92 for the purchase of that 10-contract bull call debit spread.

Theoretical Profit/Loss Graph for 10-contract AA Bull Call Spread:

That chart displays potential profits and losses at various price points at expiration. What about the periods between October 2 and expiration? What if AA had moved up to 13.54, two points above its October 2 close, on October 9, a week after the trade is established? That would be 0.54 points above the long call's strike and would also be well above the October 2 close of 12.82. On October 2, when the trader was thinking about initiating this theoretical bull call debit spread, what would the model have predicted as a theoretical gain? In actuality, as any chartist now knows, AA had moved higher than that 13.54 by October 9, but we want to know what the model predicted on October 2, when the imagined trader was considering the trade and when I was running prices through OptionOracle's theoretical price models.

Hypothetical P/L Chart of AA Bull Call Spread on October 9:

This red circle on this chart pinpoints the \$13.54 level. Following it across to the vertical axis shows the approximate expected profit the imagined trader might have been examining if planning this trade on October 2. The following table, also generated by OptionsOracle, pinpoints the theoretical profit for this 10-contract position at \$135.67 or 22.58 percent if AA had been at \$13.54 on October 9.

AA Strategy Analysis by Price for 10-contract Bull Call Spread:

What if the writer had been accustomed to just buying calls? What would the expected profit on a 10-contract purchase of AA NOV 13 calls have been? With the same option price and commission structure input, the trade would have theoretically cost a heftier \$977.96, since the long call's purchase price was not offset by the sold NOV 15 call. This would again have been the total debit and maximum risk for the trade. But what about profit when the imagined trader was looking forward a week and anticipating that AA would rise to \$13.54?

AA Strategy Analysis by Price for Purchase of 10 AA NOV 13 Calls, with Anticipated Profit on October 9:

Aha! This might explain why the writer to the CBOE's "Ask the Institute" spoke of the profit not being what was expected. If, instead of a 10-contract NOV bull call spread, ten contracts of the NOV 13 call were purchased, the profit would now theoretically be \$313.11 or 32.02 percent. If that writer was accustomed to trading straight calls, the writer might have felt cheated by the lesser profit, both in raw numbers and in percent profit, in the bull call spread.

Was there anything that could have predicted the difference and let the imagined trader anticipate that difference? Delta did. Scanning the delta column for the trade in both tables, it is obvious that deltas are much bigger in the long call only strategy. Delta measures how much the trade is likely to profit or lose with each one-point movement in the underlying.

Deltas aren't static. Although the values were different at the inception of the trade, they showed the same relationship on October 2 when this hypothetical trade was being examined. The position deltas (for all 10 contracts and all options involved in the strategies) were theoretically 251.09 for the 10-contract bull call debit spread and 514.16 for the purchase of the NOV 13 call alone. Right at the inception, the trader could have predicted that the bull call debit spread would profit less as AA climbed toward \$13.54.

Of course, the lower position delta predicted that the bull call debit spread could also be expected to lose less for each one-point decline in AA's price. The strategy analysis tables showed that if AA had dropped to \$10.74 on October 9, the 10-contract bear call debit spread would have theoretically lost \$486.28 or 80.92 percent, while the 10-contract purchase of NOV 13 calls alone would have lost \$802.84 or 82.09 percent. Although the percentage levels weren't much different, the raw number losses were. The bigger positive delta hurt more on the way down for the straight call purchase.

What's the point? Checking out delta for the options you're considering as well as for the whole position can help you determine which position will move the most with a certain move in the underlying. For a review of delta, check out the November 18, 2008 article, "Dancing with Delta," found in the archived Options 101 articles.

Once you learn how delta works, you'll want to know what it measures for your trade so you can compare one trade possibility to another or predict how an open trade will benefit or be hurt by a price change. How can you do that? Most brokerages these days do it for you. I know that think-or-swim, Trade Monster, and BrokersXpress do, at least. If you can't find that information on your platform, call support and ask if it's available. If it's not, ask if the Greeks can be added to the platform, especially delta. You can search for a software program such as the one I've used here that offers position Greeks.